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gfsmith
Level 2

Qualified Lifetime Annuity Contract (QLAC) effect on 401K RMD

I am required to start taking RMDs from my 401K. I have been told that I can continue deferring up to 1/4 of my account by purchasing a QLAC. Everything I read says that there is also a  $135K limit and the only effect on the RMD in the year the annuity is purchased with funds from the retirement account is to reduce the year-end balance from the prior year which is used to compute the current year RMD. I have told however that the limit was removed and furthermore that the RMD need not be taken in the year the QLAC is purchased. Are those 2 statements true - i.e., have the QLAC regulations changed in that regard despite my inablility to find that information via google? I am not asking for investment advice, I would simply appreciate a clarification of the regulations. Thanks.

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Accepted Solutions
ColeenD3
Employee Tax Expert

Qualified Lifetime Annuity Contract (QLAC) effect on 401K RMD

The limit was increased this year. It allows you to defer RMD past age 72.

 

  • The limit for how much of your 401(k) or IRA you can use to purchase a Qualified Longevity Annuity Contract (QLAC) has increased from $130,000 to $135,000.
  • A QLAC is a special kind of longevity annuity that allows you to defer required minimum distributions (RMDs) past age 72.
  • You can defer RMDs to as late as age 85 by converting a portion of your qualified account to a QLAC.
  • The QLAC limit (maximum amount you can convert) is now $135,000, effective 1/1/2020, up from $130,000 in 2018 and $125,00 when the QLAC was created in 2014.
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6 Replies
ColeenD3
Employee Tax Expert

Qualified Lifetime Annuity Contract (QLAC) effect on 401K RMD

The limit was increased this year. It allows you to defer RMD past age 72.

 

  • The limit for how much of your 401(k) or IRA you can use to purchase a Qualified Longevity Annuity Contract (QLAC) has increased from $130,000 to $135,000.
  • A QLAC is a special kind of longevity annuity that allows you to defer required minimum distributions (RMDs) past age 72.
  • You can defer RMDs to as late as age 85 by converting a portion of your qualified account to a QLAC.
  • The QLAC limit (maximum amount you can convert) is now $135,000, effective 1/1/2020, up from $130,000 in 2018 and $125,00 when the QLAC was created in 2014.
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

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dmertz
Level 15

Qualified Lifetime Annuity Contract (QLAC) effect on 401K RMD


@gfsmith wrote:

I am required to start taking RMDs from my 401K. I have been told that I can continue deferring up to 1/4 of my account by purchasing a QLAC. Everything I read says that there is also a  $135K limit and the only effect on the RMD in the year the annuity is purchased with funds from the retirement account is to reduce the year-end balance from the prior year which is used to compute the current year RMD. I have told however that the limit was removed and furthermore that the RMD need not be taken in the year the QLAC is purchased. Are those 2 statements true - i.e., have the QLAC regulations changed in that regard despite my inablility to find that information via google? I am not asking for investment advice, I would simply appreciate a clarification of the regulations. Thanks.


None of the sources that I follow related to retirement plans have mentioned anything about any changes to QLACs.  Also, IRS Notice 2020-79 issued in October 2020 indicates that there is no change to the dollar limitation for 2021 (remaining at $135,000) and mentions nothing about any other changes.  There are no changes to qualified longevity annuities mentioned in either the CARES Act, the Further Consolidated Appropriations Act of 2020 or the Consolidated Appropriations Act of 2021, the last two enacted in December 2020.

 

As far as I know, the limit is still 25% or $135,000, whichever is less and your RMD for the year of the purchase of the QLAC is not changed by the purchase.

 

Be aware, though, that obtaining a QLAC just to delay RMDs might not be in your best interest.  Continued growth in the account will be taxable as ordinary income while taking distributions now would allow you to invest in capital assets where growth can be taxable at lower long-term capital gains rates.  Delaying RMDs will also cause your future RMDs to be higher when not only will your required distributions be substantially larger in any giving year, potentially spiking your marginal tax rate, but also the current low tax rates expire after 2025 and return to what they were before the Tax Cuts and Jobs Act of 2017 lowered them for a time.

dmertz
Level 15

Qualified Lifetime Annuity Contract (QLAC) effect on 401K RMD

... 25% or $135,000, whichever is less ... not greater as I originally typed.

gfsmith
Level 2

Qualified Lifetime Annuity Contract (QLAC) effect on 401K RMD

thanks a lot - can you also confirm that the purchase of a QLAC in a given year does not negate the need to take an RMD in that year if otherwise necessary - i.e., it only allows you to adjust the balance used in the RMD calculation? Thanks again.

dmertz
Level 15

Qualified Lifetime Annuity Contract (QLAC) effect on 401K RMD

Correct.  The value of the QLAC on December 31 is simply excluded from the December 31 value that is used to calculate RMDs for the following year.  If there was no QLAC on December 31, 2020, the entire account value on that date is used to calculate the RMD for 2021.  Purchasing a QLAC in 2021 would not affect the 2021 RMD, it would lower the RMDs on the non-QLAC balance for years going forward.

gfsmith
Level 2

Qualified Lifetime Annuity Contract (QLAC) effect on 401K RMD

thanks again!

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